The new “transition” exemptions soon will apply to recommendations for IRAs. Fred Reish looks at how to prepare for that shift.
In a recent blog post, Reish explains that if an adviser and its supervisory entity are “pure” level fee fiduciaries, there will not be a prohibited transaction under the Internal Revenue Code (as long as the fees are reasonable). In those situations, the adviser and entity will not need to use the Best Interest Contract Exemption (BICE), and that means that they will not be bound by the best interest standard of care. Second, their services to the IRA will be regulated by the securities laws, and not by these new rules, he notes.
On the other hand, Reish notes that if there is a financial conflict of interest (that is, a prohibited transaction, or PT), the adviser and their broker dealer will need to use an exemption in order to be paid, most likely the BICE. One of the conditions is that the adviser and entity adhere to the “best interest standard of care,” essentially a combination of ERISA’s prudent man rule and duty of loyalty, according to Reish.
According to the preamble to the BICE, “The Best Interest standard set forth in the final exemption is based on longstanding concepts derived from ERISA and the law of trusts. It is meant to express the concept, set forth in ERISA section 404, that a fiduciary is required to act solely in the interest of the participants … with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Similarly, both ERISA section 404(a)(1)(A) and the trust-law duty of loyalty require fiduciaries to put the interests of trust beneficiaries first, without regard to the fiduciaries’ own self-interest.”
That’s going to require some education — and, as Reish counsels, “As a result, broker-dealers and others should look to training and education materials based on ERISA’s provisions, DOL regulations and guidance, and ERISA litigation. Those materials should cover the broad concepts and principles, but should also provide detailed education about the information to be reviewed and the processes to be followed, on a step-by-step basis.”